Location Strategy

OutlineThe Strategic Importance of LocationFactors That Affect Location DecisionsMethods of Evaluating Location AlternativesThe Factor-Rating MethodLocational Break-Even AnalysisCenter-of-Gravity MethodThe Transportation Method

FedExStresses on hub concept

Plant Location DecisionsCost focusRevenue varies little between locationsLocation is a major cost factorAffects shipping & production costs (e.g., labor)Costs vary greatly between locations

Plant Location DecisionsRevenue focusCosts vary little between market areasLocation is a major revenue factorAffects amount of customer contactAffects volume of business

In General - Location DecisionsLong-term decisionsDifficult to reverseAffect fixed & variable costsTransportation cost As much as 25% of product priceOther costs: Taxes, wages, rent etc.Objective: Maximize benefit of location to firm

Location Decision Sequencecountryregionsites

Factors Affecting CountryGovernmentCulture & economyMarket locationLabor availability, attitudes, productivity, and costInfrastructureExchange rate

Region Location DecisionsCorporate desiresAttractivenessLaborUtility costsGovernment incentivesProximity to customers & suppliersLand/construction $$$

Factors Affecting SiteSite sizeSite costTransportation in/outProximity of servicesEnvironmental impact

Location Decision ExampleIn 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

1995 Corel Corp.

Country Decision FactorsMarket locationU.S. is worlds largest luxury car marketGrowing LaborLower manufacturing labor costs$17/hr. (U.S.) vs. $27 (Germany)Higher labor productivity11 holidays (U.S.) vs. 31 (Germany) OtherLower shipping cost ($2,500/car less)New plant & equipment would increase productivity (lower cost/car $2,000-3000)

Region/Community Decision FactorsLaborLower wages in South Carolina (SC)About $17,000/yr (SC) vs. $27,051/yr (US)Based on 1993 metropolitan averages for all workersGovernment incentivesstate & local tax breaksFree-trade zone from airport to plantNo duties on imported components or on exported cars

Close to market vs close to materialNeed to be Close to market :Makers of bulky or heavy productsJapanese car makersFood IndustryAuto parts suppliersConsumer goods Need to be Close to material :Cement industry

Location Evaluation MethodsFactor-rating methodLocational break-even analysisCenter of gravity methodTransportation model

Factor-Rating MethodMost widely used location techniqueUseful for service & industrial locationsRates locations using factorsIntangible (qualitative) factorsExample: Education quality, labor skillsTangible (quantitative) factorsExample: Short-run & long-run costs

Steps in Factor Rating MethodList relevant factorsAssign importance weight to each factorDevelop scale for each factor (0-1, etc.)Score each location using factor scaleMultiply scores by weights for each factor & totalSelect location with maximum total score

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Factors Affecting Location SelectionLabor costsLabor availabilityProximity to materials and suppliersProximity to marketsGovernment fiscal policiesEnvironmental regulations

Environmental regulationsUtilitiesSite costsTransportation availabilityQuality-of-lifeForeign exchangeQuality of government

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ExampleMyCompany.co has decided to build a new plant location. There are two possible sites: somewhere and anywhere, the weighting and the rating are shown belowSelected location

Scores (out of 100)Weighted scoresFactorWeightSomewhereAnywhereSomewhereAnywhereLabor cost& attitude25%706017.515.0Transportation system5%50602.53.0Education & health10%85808.58.0Tax structure39%757029.327.3Resource & productivity21%607012.614.7Total100%70.468.0

Locational Break-Even AnalysisMethod of cost-volume analysis used for industrial locationsStepsDetermine fixed & variable costs for each locationPlot total cost for each locationSelect location with lowest total cost for expected production volumeMust be above break-even

ExampleYoure an analyst for AC Delco. Youre considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year?

Locational Break-Even Crossover Chart

Center of Gravity MethodFinds location of single distribution center serving several destinationsUsed primarily for servicesConsidersLocation of existing destinations Example: Markets, retailers etc.Volume to be shippedShipping distance (or cost)Shipping cost/unit/mile is constant

Transportation ModelFinds amount to be shipped from several sources to several destinationsUsed primarily for industrial locationsType of linear programming modelObjective: Minimize total production & shipping costsConstraintsProduction capacity at source (factory)Demand requirement at destination

Example

The ProblemHow much should be shipped from several sources to several destinations Sources: Factories, warehouses etc.Destinations: Warehouses, stores etc.Transportation modelsFind lowest cost shipping arrangementUsed primarily for existing distribution systems

Transportation Table

Initial Solution Using the Northwest Corner Rule

Stepping-Stone Method: Tracing a Closed Path for the Des Moines to Cleveland Route

Final Thoughttwijaya@ugm.ac.idThe ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country wherever cost per unit is lowest.

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